The 38 per cent Defence budget blowout
By Richard Harman (author)
It is crunch day for Labour’s Budget with the unveiling of the Half Yearly Economic and Fiscal Update and the Budget Strategy Report.
The reports will come as more evidence surfaces of blowouts and mismanagement in the defence budget which threaten to undermine Labour’s whole capital spending plan.
Already the new Government will have to find $2.2 billion if it wants to replace the Orion maritime patrol aircraft which the previous Government did not make any provision for.
The only consolation for Labour will be that the blowouts appear to be the fault of the National Government.
One former Defence Minister, Gerry Brownlee, simply dismissed criticism of the overspending in defence as Treasury's failure to understand real politics.
The latest blowout relates to an upgrade of the two ANZAC frigates, Te Mana and Te Kaha,
It was originally budgeted to cost $491 million but had blown out to $523 million by June when Treasury reported on the project.
Yesterday Defence Minister Ron Mark said that sum had now jumped another $116 million to $623 million; 38% more than the original budget.
The upgrade includes anti-aircraft missiles; a sonar and underwater telephone upgrade; anti-ship missile defence decoys; a torpedo defence System; replacement of the frigates’ inertial navigation system and a new navigation radar system.
However, defence experts are not convinced the upgrade will transform the frigates all that much.
The authoritative Defence Industry Daily, in a 2014 comment on the awarding of the contracts for the work said: “Overall, the upgrade brings the frigates up from "obsolete" status to that of low-end modern frigates or a high-end Corvette.”
Mark said that the previous Government “after first becoming aware of this issue in September 2016, when additional costs were first estimated at between $65-74 million, failed to resolve it over a year, while costs continued to increase, and schedule delays became longer and longer.”
Appearing before Parliament's Foreign Affairs, Defence and Trade Committee last June, then-Defence Minister Gerry Brownlee defended the delays and cost increases in the project.
"Once you've made those decisions, it won't matter how many times Treasury get upset about the expenditure on something that they don't agree with; they don't put their name on a ballot paper, they don't stand on street corners talking to constituents,” he said.
“"They don't have a responsibility for the security of New Zealand.
"It's a capability the Government wants, it's a capability the Government is paying for, it's a capability we're going to get."
But the concerns within Treasury were growing.
In November the section on the frigates in Treasury’s Major Projects Performance Report was heavily redacted.
It reduced the "Project Health" to red --- that meant Treasury considered there were “major issues with project definition, schedule, budget, quality and/or benefits delivery, which don't appear to be manageable or resolvable without changes being made.”
They increased the budget for the upgrade to $523 million.
The next Treasury report was last April and noted that the next phase of the project, the actual installation of the equipment “has proven more complex than expected."
It said the contract proposal for the installation phase was due to be presented to Defence on 20 June 2017.
Mark told the House yesterday that “crucially, the contractor provided a final fixed firm price in June 2017, and this was not taken up in the run-up to the election.
“This decision imposed a further real cost to taxpayers and the Navy, with the contract having to be reopened and renegotiated, causing additional costs to be incurred, and a significant delay to the point at which installation of this essential equipment on the frigates could begin."
Former Defence Minister Mark Mitchell who presided over the major part of the cost blowout has promised to respond to Mark's claims. POLITIK awaits that response. .
The Navy is now going to have to pay the price for the frigate cost blowout.
The Navy’s proposed enhanced diving and hydrographic ship will be scaled back to a more conventional vessel.
“To fund the cost overrun, and consistent with the Coalition’s commitment to fiscal prudence, Cabinet has agreed to reallocate a portion of the money that was provisioned in Budget 2017 for the Littoral Operations Support Capability project,” said Mark.
“This trade-off will mean that a contemporary, off-the-shelf commercial dive and hydrographic vessel will be procured, rather than a more advanced, specifically designed military vessel.”
There’s no doubt that Labour faces a real capital spending squeeze and much of that pressure comes from defence.
At this stage they can blame the previous Government for the situation.
But they will also be looking for capital for new schools and hospitals; a Labour Government is unlikely to postpone those so it can maintain defence expenditure.
There may be some hint today as to where its preferences will lie.